POOLING investor assets results in a number of efficiencies
including significant cost savings. That said, advisers should
be aware of certain considerations that arise depending
on the types of investors that participate in pooled investment funds. Specifically, certain requirements under the
Employee Retirement Income Security Act (ERISA) and the
Internal Revenue Code (IRC) must be met when accepting
benefit plan investors, such as ERISA-covered plans and
individual retirement accounts (IRAs).

If the assets of the pool are plan assets and at least one
ERISA-covered investor is invested, the adviser and other
parties connected to the pool will be subject to ERISA’s
fiduciary duty provisions and the IRC’s prohibited transaction provisions. Further, if IRAs invest in the pool, the IRC’s
prohibited transaction (PT) provisions will apply.

Advisers should be familiar with authorities that provide
guidelines on the nuances of the “plan assets” status.
Department of Labor (DOL) Regulation Section 2510.3-101
and ERISA Section 3( 42) establish when the assets of a pool
are deemed plan assets. The intent behind the DOL regulation, issued in 1986, was to prevent parties from avoiding
fiduciary status by simply pooling the assets of investors.
Section 3( 42) was enacted by Congress in 2006 to make
some of the regulation’s requirements easier to apply and
to reduce the instances in which the assets of an entity are
deemed plan assets.

The assets of an entity that issues “publicly offered
securities” as defined in the regulation and the assets of
an investment company registered under the Investment
Company Act of 1940—e.g., a mutual fund—are not plan
assets for purposes of ERISA and the IRC. On the other hand,
some assets are always plan assets with regard to ERISA-covered and IRA investors: the assets of a group trust that
is exempt from tax under IRC Section 501(a)—also known
as an 81-100 trust; a common or collective trust fund of a
bank; and a separate account of an insurance company—
i.e., other than a separate account maintained solely in
connection with fixed contractual obligations of the insurance company if certain conditions are met. A portion of
the assets of an insurance company general account may
also be plan assets.

The regulation further provides that the assets of an oper-ating company, which include a real estate operating company(REOC) and a venture capital operating company (VCOC), arenot plan assets. An operating company is an entity “primarilyengaged, directly or through a majority-owned subsidiary orsubsidiaries, in the production or sale of a product or serviceother than the investment of capital.” The REOC and VCOCFinally, the assets of an entity are deemed plan assets ifparticipation of benefit plan investors in any class of equityissued by that entity is significant. Ownership is consideredsignificant if more than 25% of the class is owned by suchinvestors. Section 3( 42) of ERISA modified the applicationof this “significant participation” test in the regulation. Abenefit plan investor is, for the most part, an ERISA-coveredplan, an IRA or another entity whose assets are deemedplan assets.

The determination of whether the assets of a pool are
plan assets is important. If they are not plan assets, an
adviser and other parties will not be acting as fiduciaries
with regard to management and other activities connected
to the pool.

If a pool holds plan assets, the adviser and possibly
other parties will be fiduciaries. Fortunately, there are
common prohibited transaction exemptions (PTEs) available to advisers managing plan assets. For example,
advisers commonly rely on the qualified professional asset
manager (QPAM) exemption. Importantly, this exemption is available only to certain advisers, such as banks,
insurance companies, broker/dealers (B/Ds) and registered
investment advisers (RIAs) that meet certain minimum
size requirements. Thus, smaller adviser firms may not
qualify for the exemption. An exemption strategy may
also be dictated by the type of pool. For example, a specific
exemption is available to bank-maintained collective
investment trusts (CITs).

In summary, while ERISA-covered plans, entities whose
assets are plan assets, and IRAs may be attractive sources
of investment capital for a pool, advisers should be aware
of the implications of holding plan assets, and structure
their operations either to avoid managing such assets or
to have an appropriate compliance apparatus in place to
ensure adherence to ERISA and the IRC.

compliance consultPooling Investors’ AssetsA way to save money, but maybe at a cost

DavidKaleda is a principal in the fiduciary responsibility practice
group at Groom Law Group, Chartered, in Washington, D.C. He has
an extensive background in the financial services sector. His range of
experience includes handling fiduciary matters affecting investment
managers, advisers, broker/dealers, insurers, banks and service
providers. He served on the Department of Labor ERISA Advisory
Council from 2012 through 2014.